Many individuals, groups, institutions, and corporate entities invest money in various assets in the hope of making a return on their investment. Every investment has some degree of risk, which reflects the probability that some or all of an investment will not be recovered. Some assets have very little risk, while others pose a high degree of risk. Generally speaking, the higher the risk, the better the chance of a higher return on investment, even if that chance of a higher return is relatively small. To manage the risk associated with investments that have the potential for higher returns, some investors diversify their investments into a portfolio. Diversification generally means combining assets which have low correlation to each other.
Risk and correlations of assets may change over time. As such, diversification using static estimates of correlation is not always a safe strategy. Diversification, and oftentimes investment strategies in general, rely on a long-term view of the market. Dynamic moves in the marketplace may have implications that affect a wide range of investment types or asset classes. These dynamic moves may be caused by domestic events or worldwide events. These dynamic moves may cause a paradigm shift in investment principles for an asset class, which may change an asset class from low risk to high risk or vice-versa.